Speaking of Japan, and we say this because the U.S. is following a very similar post-credit collapse pattern, we note that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count 423,000 rally points from all the up-days since the secular bear market began in 1990 and yet the index is down 74% since that time. So actually there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally — this is not the onset of a whole new sustainable bull market. These are rallies [...] purely technically-motivated and momentum-driven. They are not premised on improved fundamentals, despite data that are skewed to the upside by rampant government intervention. Just remember, nobody built more bridges or paved more river beds to skew the economic data than the LDP did in Japan for much of the 1990s. With U.S. T-bill yields close to zero, as they were in Japan, we have at least one market — the money market — that sees what we see, which is an economic outlook fraught with fragility, as is typically the case after a secular credit expansion moves shifts into reverse.

Now, the S&P 500 is all the way back to where it was in early October 2008. Back then, the consensus was looking for $26 for this quarter’s EPS. That number is now down by almost half, to just over $14. So again, the market has gone ahead and priced in some very good news for the future because there can be little doubt that the economy and earnings have a much deeper hole to climb out of than the consensus had been factoring in the last time equity prices were at current levels. Moreover, as it pertains to consumer credit quality, we just saw Citi and BoA reported their highest credit card default rates since the recession began (BoA’s charge-off rate rose to 14.54% from 13.81% in July; Citi’s rose to 12.14% from 10.03%; Discover’s rose to 9.16% from 8.43%).